SEC sanctions firm for faulty audits

An auditing firm and several top employees have been sanctioned for alleged audit failures involving a company that was found to be falsely inflating its revenues.

The U.S. Securities and Exchange Commission (SEC) charged RSM US LLP and three senior employees at the firm for failing to properly audit the financial statements of Revolution Lighting Technologies Inc., which was inflating its revenues over four years.

According to the SEC’s order, RSM failed to meet the Public Company Accounting Oversight Board’s (PCAOB) auditing and quality control standards in planning and supervising its audits of Revolution Lighting.

In 2020, Revolution Lighting and several of its employees settled accounting fraud allegations with the SEC for falsely inflating its revenues over four years by recognizing sales revenue far earlier than permitted under accounting rules.

Without admitting or denying the SEC’s findings, RSM agreed to pay a US$3.75 million penalty, to be censured, and to hire an independent consultant to review and evaluate its policies and procedures.

The SEC also settled with two RSM partners and a senior audit manager for their roles in the improper audits, which found that they “failed to adequately plan, supervise, and execute the audits.”

The employees, who also settled without admitting or denying the SEC’s findings, agreed to sanctions, including to a censure, a cease-and-desist order, along with a three-year suspension from appearing before the SEC as an accountant for one of the partners, and a one-year suspension for the senior audit manager.

“Auditors are important checks against fraud, and they should be scrutinizing arrangements like bill and hold sales,” said Gurbir Grewal, director of the SEC’s division of enforcement, in a release.

“RSM failed to do this at all levels, from the engagement team up through the firm’s national office. And by giving Revolution a pass, investors learned only too late that Revolution was committing a multi-year fraud,” he said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.